Two European investment banks face big restructuring challenges at worst possible time

By Paul J. Davies

A Credit Suisse branch in Milan, Italy, earlier this month. Credit Suisse’s stock has become the ugly duckling of European banks, underperforming peers over three and six months. Photo: stefano rellandini/ReutersInvestment banking will have a tough year, especially in Europe. But for some the downturn couldn’t have come at a worse time.Deutsche BankDB-1.20% and Credit Suisse,CSGN0.82% for different reasons, stand out as having the hardest jobs to do during a year that could be worse even than 2008 for global investment banking based on first-quarter revenues, according to Thomson Reuters.Deutsche Bank has warned investors about 2016 repeatedly since it grabbed the nettle on cutting back and restructuring its investment bank and markets business last year. At Credit Suisse, its more ambitious plans have already been undone by shock losses, leading to last month’s surprise strategy overhaul.

Consequently, Credit Suisse’s stock has become the ugly duckling of European banks, underperforming peers over three and six months.These two have the same problems as most Europeans, but they are exaggerated because action wasn’t taken sooner. Rising regulatory costs and fines have run up against declining market activity and the drag of ultralow interest rates on revenues.This hurts profitability and so restricts the capital that banks can create, which they need to meet rising requirements over coming years. If banks can’t generate capital, they need to cut assets, which further hurts revenues, meaning even more cost-cutting is necessary—and so the vicious circle goes on.In investment banking and markets, the effects are visible in league tables. Deutsche Bank dropped out of the global top-three for these combined business in 2015, according to Coalition, a research group.In investment banking alone, which includes merger advice and helping companies raise debt and equity but not trading, Deutsche Bank has dropped to eighth globally in the first quarter of 2016, according to Thomson Reuters. It fell below Credit Suisse, which managed to maintain its market share in the U.S. through decent M&A activity even as its European market share crumbled across the board.

The message for investors is that 2016 is a year to write off before it has really even begun. With the U.K.’s referendum on European membership and a U.S. presidential election as well as a stuttering global economy, no bank is going to be rescued by a sharp pickup in capital markets activity, or rising interest rates.But these two banks also need to push through their overdue restructuring even if it is the toughest time to do so. Otherwise they risk still suffering the financial drag when markets do improve and so being left behind by rivals.Deutsche Bank with its bigger balance sheet still has further to travel on this road than Credit Suisse. But in a miserable year for banks, neither will shine.

If you know the other and know yourself, you need not fear the result of a hundred battles.

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We are travelers on a cosmic journey, stardust, swirling and dancing in the eddies and whirlpools of infinity. Life is eternal. We have stopped for a moment to encounter each other, to meet, to love, to share.This is a precious moment. It is a little parenthesis in eternity.